Parametric tests of allocative efficiency in the manufacturing sectors of India and Pakistan

This paper estimates allocative inefficiency in the manufacturing sectors of India and Pakistan. Based on an extension of the translog profit function approach, we propose a new method to the estimation of allocative inefficiency in two countries (or groups). The model is estimated using pooled annual data from the large scale manufacturing sectors of India and Pakistan over the period 1959-87. We find evidence of allocative inefficiencies in both countries. Specifically, results reveal that manufacturing firms in the two countries over-utilize capital and raw materials relative to labour and energy. The magnitude of over-utilization of capital is more severe in Pakistan than in India. We argue that these findings are hardly surprising given the structure of factor markets and past government policies in the two countries.